SIMPOSIUM NASIONAL AKUNTANSI 9 PADANG Padang, 23-26 Agustus 2006 1 PROFITABILITY AND CORPORATE GOVERNANCE DISCLOSURE: AN INDONESIAN STUDY Dwi Novi Kusumawati Prasetya Mulya Business School Abstract This research aims to test empirically the relationship between profitability and the level of corporate governance voluntary disclosure. There are two streams of research regarding the direction of relationship between those two variables, making it interesting to be test statistically in the context of corporate governance disclosure. The GCG disclosure level is measured using 161 items recommended by GCG Codes which are developed by KNKCG (2001). Data are taken from annual reports 2002. The result shows that, after controlling the model by several variables usually used in the disclosure research, profitability are negatively correlated with GCG disclosure. In other words, companies tend to give more comprehensive GCG disclosure when facing a slowdown in profitability measurements. Therefore, markethave to take cautious in considering the GCG disclosure given by public companies since it could be used by management to cover bad performance. Keywords : Corporate Governance, Voluntary Dislcosure, Profitability K-INT 14
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8/14/2019 Simposium Nasional Akuntansi 9 Padang Profitability And
PROFITABILITY AND CORPORATE GOVERNANCE DISCLOSURE: AN
INDONESIAN STUDY
Dwi Novi KusumawatiPrasetya Mulya Business School
Abstract
This research aims to test empirically the relationship between profitability
and the level of corporate governance voluntary disclosure. There are two streams
of research regarding the direction of relationship between those two variables,
making it interesting to be test statistically in the context of corporate governance
disclosure. The GCG disclosure level is measured using 161 items recommended by
GCG Codes which are developed by KNKCG (2001). Data are taken from annual
reports 2002. The result shows that, after controlling the model by several variablesusually used in the disclosure research, profitability are negatively correlated with
GCG disclosure. In other words, companies tend to give more comprehensive GCG
disclosure when facing a slowdown in profitability measurements. Therefore, market
have to take cautious in considering the GCG disclosure given by public companies
since it could be used by management to cover bad performance.
Disclosure management is one of strategic planning that has to be carefully
considered by management, especially for management of public companies. Any
information published to the market could create market perception which,
afterwards, could give an advantage or disadvantage for the company itself. Many
researches have been conducted in the field of disclosure. Those researches could be
divided into two categories. The first category is studies examining factors affecting
management disclosure decision, and the second one is studies examining effect of
disclosure to various evonomic events or market reaction to the disclosure.
Based on the type of disclosure, previous studies could also be divided into
studies examined disclosure in general, both mandatory and voluntary, and studies
examined certain type of disclosure, such as financial disclosure, social
responsibility disclosure, environmental disclosure, etc. This study investigates one
kind of disclosure that has not been researched much but getting more attention
recently, which is good corporate governance (GCG) disclosure.
Corporate governance, terms that is being concerned internationally since the
revelation of many international scandals such as Enron and WorldCom. Corporate
governance is not a new term or an innovation, but the public awareness of its
importance has just been built recently. This awareness has pushed standard setters
in many countries to develop and improve the corporate governance practices. In
Asia, corporate governance practices even has become the important element of
economic remodeling in overcoming economic crisis (FCGI, 2002).
Indonesia has also responded the market demand of good corporate
governance pratice by forming a committee in 1999 that is assigned to formulate and
recommend national codes on good corporate governance. This committee, Komite
Nasional tentang Kebijakan Corporate Governance (KNKCG), has published
corporate governance codes on 2001 as guidance for Indonesian companies in
implementing good corporate governance principles. The adoption of this copes is
voluntarily, except for several parts that has been obligated by national standard
setters such as Bapepam or JSX.
Labelle (2002) shows that the determinants of disclosure quality of corporate
governance practice may not be the same as the determinants of financial disclosuredecision aspects. Therefore, it is necessary to investigate whether the factors
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affecting level of financial disclosure also become the factors affecting level of
corporate governance disclosure. Specifically, this study is aimed to test whether
profitability variable has the same direction of relationship with corporate
governance disclosure as with financial disclosure.
Kusumawati and Riyanto (2005) have attempted to test empirically the effect
of GCG disclosure to market value of the firm. The result suggested that market
respond the GCG disclosure positively. Market value of the firm was measured by
market to book ratio, one ratio that measure how much market, or the investors,
value one company compared to its book value. Therefore, it is interesting to test
whether the company, on the contrary, also gives something more back to investors.
One of the returns that is expected could enhace shareholders’ value is profitability.
Profitability is one variable that is extensively being researched in many
disclosure studies. Most of the studies conducted in financial disclosure proved
positive relationship between profitability and financial disclosure level (Shinghvi
and Desai, 1971; Lang and Lundholm, 1993; Ahmed and Courtis, 1999; Haniffa and
Cooke, 2002; Miller, 2002). Studies conducted on other type of disclosure, such as
social and environmental disclosure gives mixed result though most studies recently
gives negative correlation between those two variables.
Study examined the relationship between corporate performance and
corporate governance disclosure has been conducted by Bujaki and McConomy
(2002) in Canada. Using revenue as measurement, the study suggested that firms
facing a slowdown in revenues tend to increase their disclosure of coporate
governance practices, consistent with an effort to reassure investors and relieve
share price preassure (Beneish, 1997 in Bujaki and McConomy, 2002). Moreover,
the study also revealed that firms manage corporate governance disclosuresubsequent to an apparent failure, to ensure that thay have more comprehensive
corporate governance disclosures thereafter.
Based on previous studies described before, it is interesting to examine the
relationship between profitability and GCG disclosure level. Moreover, it is
interesting to test the direction of that relationship since the research in corporate
governance disclosure has not been conducted much. Therefore, the research
question of this study is whether profitability affects the level of corporate
governance voluntary disclosure in Indonesia.
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Voluntary disclosure has been researched in many studies. There are many
factors hypothesized as the influencing factors in disclosure decision making of
management. Most of the literature investigates firms’ specific characteristics as
primary variables affecting the level of voluntary disclosure (Singhvi and Desai,
1971; Chow and Wong-Baren, 1987; lang and Lundholm, 1993; Meek et al., 1995;
Craig and Diga, 1998, etc). Haniffa and Cooke (2002) divide firms’ specific
characteristics into 3 parts, which are corporate structure, corporate performance,
and market-related firms’ specific characteristics. This study will focus on corporate
performance characteristic, as measured by profitability, while the other
characteristics will be used as control variables.
The effect of corporate performance on disclosure level could be positive,
negative, or constant (Lang and Landholm, 1993). The positive relationship is based
on assumption that company will disclose more when it has good or extraordinary
performance. This relationship is supported with adverse selection theory which
predicts that with certain disclosure cost, high-performed companies will give
disclosure while companies below the expectation will not disclose.
Well performed companies also being motivated to differentiate themselves
from other companies in order to enhance their capital with the best-achievable
terms. In this case, they are aimed to reduce their own cost of capital by giving more
disclosure to the market. Therefore, well performed companies are expected to
disclose more information about their performance (Meek et al., 1995).
Certain types of negative information, especially earnings, could also beingdisclosed voluntarily by the firms in order to reduce litigation cost. This hypothesis
supports negative correlation between performance and disclosure level. Disclosure
is also hypothesized that it could reduce cost of capital through the reduction of
information gathering cost by investors. This cost reduction could enhance the
amount of investors willing to invest on the company, thereafter could enhance
liquidity and decrease the cost of capital. In this point of view, then, company
performance will not affect disclosure level.
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Most of the studies previously discussed support the positive relationship
between corporate performance (profitability) and disclosure level in annual report.
Study conducted by Ahmed and Courtis (1999) which combined 12 profitability
studies suggests that profitability, in general, having positive and significant
relationship with voluntary disclosure level. However, this relationship is not found,
or insignificant, in the disclosure study combined mandatory and voluntary
disclosure.
Studies mentioned before are conducted on financial disclosure. Study in the
specific type of disclosure, corporate governance disclosure, has been conducted by
Bujaki and McConomy (2002). The study reveals that firm facing a slowdown in
revenues tends to increase their disclosure of corporate governance practices.
Moreover, firms suffering serious corporate governance gailures tend to provide
extensive disclosure of governance guidelines implemented in the period after such
failures.
Jackson and Carter (1995) stated that the contemporary interest in corporate
governance is, in significant part, activated because of the revelation of many
scandals in the world of business. The interests intended to be served by such
monitoring are those of shareholders. The favoured approached to improving
corporate governance is to increase the light cast on corporate practice. The favorite
metaphor is that of transparency, making the invisible visible. But, by illuminating
some things, other things inevitably become cast in shadow.
Corporate governance can be seen as intended to throw light upon aspects of
corporate practice, by means of transaparency or disclosure. But, if the light to be
cast is selective, it becomes appropriate to ask, on what grounds is selection made,and who are to be the arbiters of what should be disclosed (Jackson and Carter,
1995). This management of light and shadow (chiaroscuro in art) makes some issues
visible and conceals others. Thus, in the case of corporate governance disclosure, do
companies experiencing bad performance use this light-and-shadow management in
making decision of corporate governance disclosure?
Since the studies supporting positive relationship between profitability and
disclosure are conducted in financial disclosure field, the hypothesis of this study
will be in the form of negative relationship. It is also consistent with previous
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to retain their reputation. Therefore, auditor could act as a border of management
opportunistic behavior (Watts and Zimmerman, 1986).
This research do not use auditor status defined as the Big-Four firms, instead
it defined as whether the company is audited by accounting firm affiliated with
foreign accounting firms or not. The argument used is because it is assumed that
foreign accounting firms have already had more experience and knowledge on
corporate governance issues compared to local accounting firms.
H 4 : Auditor status positively affects the level of GCG dislcosure in annual report.
Industry. The variation of disclosure level is more being influenced by the
sensitivity of one industry to political costs (Craig and Diga, 1998). Companies that
are more sensitive will be forced to give more information than other companies in
other industries. Disclosure could also vary and will be higher in certain industries
that is regulated and monitored by government. Studies about the difference of
disclosure level based on industry have been conducted by Meek et al. (1995), Craig
and Diga (1998), Haniffa and Cooke (2002), Rahman and Hamdan, and Bujaki and
McConomy (2002). All of those studies, in the financial voluntary disclosure, give a
significant result.
H 5 : Industry type affects the GCG disclosure level in annual report.
Dispersed ownership level. The agency theory states that disclosure will be
higher for companies which have more dispersed ownership (Haniffa and Cooke
2002). It happen because with dispersed ownership, the owner will demand more
disclosure to monitor management opportunistic behavior compared to companies
that have more centralized ownership.
This variable has also being investigated by Labelle (2002) specifically inthe case of corporate governance disclosure. Labelle (2002) posits that managers of
management-controlled (diffused ownership) company could use their control of
information disclosed to public in the most favorable and defensible manner. This
argument shows that companies with more dispersed ownership have bigger interest
in providing more qualified information compared to owner-controlled companies.
H 6 : Dispersed ownership level positively affects the GCG disclosure level in
annual report.
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The problem examined in this study is whether profitability affects voluntaryGCG disclosure level. The relationship is controlled with other firm characteristics
variables, which are size, listing status, auditor status, industry and dispersed
ownership level. Those control variables are used because they have been
empirically tested as having effect on disclosure level in many studies. The research
model could be described in Figure 1.
INSERT FIGURE 1 HERE.
3.2. Sample
Sample is taken from annual reports 2002 published by public companies
listed on Jakarta Stock Exchange. Annual report is used disclosure medium since
previous research has found that the disclosure level in the annual report is
positively correlated with disclosure level in other medium (Lang and Lundholm,
1993). Campbell (2000) also notes that annual reports are the most widely
distributed of all publicly produced documents of an organization (Bujaki and
McConomy, 2002). All companies are treated the same, regardless their industry,
since it will be controlled by controlling variables.
3.3. Operational Definitions and Measurements of Variables
The measurement of GCG voluntary disclosure level variable is based on
items in the GCG Codes recommended by KNKCG 2001. Explicitly, KNKCG
(2001) stated that the Codes are developed using method that is enabling companies
to enhance and adopt GCG standards which are more contructive and flexible, and
not using the regulation that could force companies to implement them. Thus, the
adoption of the Codes is voluntary in nature for public companies, except for several
parts of the Codes that has been obligated by Bapepam or JSX, such as the
regulation about independent commissionaire, audit committee, and corporate
secretary. Therefore, all items that have been regulated by other standard setters
have been excluded from GCG disclosure level measurement.
For each items recommended by the Codes (the most detail items), a
company will be given one point if it disclose certain item and zero if it doesn’t give
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b. Directors Compositionc. Compliance to AoA and Law
d. Forbidden of Taking Personal
Gain
e. Directors Meeting
f. Internal Controlsg. Directors Roles in Accounting
h. Registers
4. Audit Systems
a. External auditor
b. Audit Committee
c. Information
d. Confidentiality
e. Audit Regulations
5. Corporate Secretary
a. Corporate Secretary Functions
b. Qualifications
c. Accountability
d. Corporate Secretary Role in Disclosure
6. Stakeholders
a. Stakeholders Rights b. Stakeholders Participation in Management Monitoring
7. Disclosure
a. Timely and Accurate Disclosure
b. Matters of Material Importance to Decision Making
c. Compliance Disclosure to the Codes
d. Disclosure of Price Sensitive Information
8. Confidentiality
9. Insider Information
10. Business and Anti-Corruption Ethics
11. Donation
12. Compliance to Health Protection, Working Safety and Environmental Law13. Equitable Working Opportunity Notes: This is only the Summary (Sub-Title) of all 161 items used to measure GCG